The Godfather of Technical Analysis, Richard D. Wyckoff, was a master trader in the early 1900s, and his timeless lessons remain relevant to this day. Wyckoff developed a system of analyzing the stock market that is still widely used by traders and investors alike.
His principles are based on the idea that stock prices move in predictable patterns. These patterns are a result of human behavior as traders and investors move the markets through buying and selling. Wyckoff viewed the market as a reflection of collective sentiment and used this knowledge to profit from short-term fluctuations. He developed a three-step approach for analyzing the markets, which has come to be known as the Three Steps of the Wyckoff Method.
The first step is to identify the cause of a move in the market, which is often referred to as “the big picture.” Wyckoff was fond of looking at markets through the lens of supply and demand, examining the forces driving prices. He paid attention to volume of activity and looked for divergences between price and volume in order to anticipate future moves in the market.
The second step is to list all of the possible scenarios that could arise from a given situation. This is similar to a chess player visualizing the positions from a certain move before making it. Wyckoff created a system of mental stops to identify what kind of reaction a given situation might produce and used this knowledge to stay ahead of the market. This step also requires keen observation and analysis of the charts in order to spot any discrepancies that could indicate a possible shift in the market.
Finally, the third step is to devise a plan of action to take advantage of the situation. This step is where Wyckoff’s advice on protecting profits is particularly useful. He warned against becoming too attached to positions and stressed the importance of balancing out the risk and reward. This is why he encouraged traders and investors to find a comfortable stop-loss level and trailing stops in order to protect any profits they have made.
Wyckoff’s lessons remain relevant to this day, and his approach is still used by trading professionals around the world. While the markets have changed and become more complex, the principles he outlines are timeless, and his advice can certainly help investors navigate the volatility of the stock markets.